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Stochastic: The Basics by kensey

Next	List All	Return to Oscillating

Stochastic is an oscillator.
An oscillator compares the current price of a stock to its trading range in the recent past. It tells us if the current price is unsustainable and about to turn around and head in the other direction.

Stochastic helps identify turning points as prices swing back and forth within the scope of the more significant trend identified by MACD. Stochastic can be used to time trades effectively, but it needs to be used in conjunction with MACD. If MACD indicates an uptrend, stochastic can be used to time trades in the direction of that trend (up). If MACD indicates a downtrend, stochastic can be used to time trades in the direction of that trend (down). You don't want to trade opposite the direction of the broader trend!

Cisco Sys Inc (CSCO)

You can see the essential behavioral attributes of stochastic and MACD in the indicator graphs of CSCO.

The green bars on the top of the price graph indicate that CSCO is in an uptrend. Green means GO: you want to look for timely opportunities to buy the stock.

In mid-April, stochastic dipped below the bottom reference line. This means that CSCO was trading at a lower price compared to the range of prices in the recent past. CSCO was oversold. If you were looking to buy the stock, this was a good opportunity.

The more shallow retracement in late April was also a nice opportunity to trade into CSCO. Stochastic did not quite hit the bottom reference line, but it still indicated short-term weakness in the price of the stock.

When you are convinced of a trend's integrity, buying on pullbacks makes sense. Stochastic helps you identify these opportunities.

Next: Oversold in an Uptrend: AOL

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